Читать книгу Islamic Finance and the New Financial System - Alrifai Tariq - Страница 12

As trade flourished in Europe, merchants grew to be very wealthy, and many of them amassed huge hoards of gold. The safest place to store this wealth at the time was to entrust it to the Royal Mint. However, in 1640, King Charles I of England seized the private gold stored in the mint, calling it a loan, which was to be paid back over time.26 This caused merchants to remove their gold from the mints and place it instead with goldsmiths. Goldsmiths in England had been craftsmen, bullion merchants, money changers, and money lenders since the sixteenth century, but did not actively get involved in gold storage until this event. They also possessed private vaults.

Merchants began storing their gold in goldsmiths' vaults for a fee. In exchange for each deposit of precious metals – namely, gold and silver – the goldsmiths issued receipts certifying the quantity and purity of the metal they held in trust. These receipts could not be assigned to another party. Only the original depositor could collect the stored precious metals. With all the precious metals stored in vaults sitting idle, goldsmiths soon began lending out the metals on behalf of depositors and issuing promissory notes for money deposited. These deposits were treated as loans from the depositor to the goldsmith. The depositors allowed the goldsmith to use the money for any purpose, including advances to his customers. Goldsmiths did not charge a fee for accepting these deposits and, in many cases, paid interest on them. This was the beginning of the fractional reserve banking system, as these promissory notes were payable on demand and the loans to the goldsmith's customers were repayable over a longer time period. Gold deposits were relatively stable, often remaining in the goldsmith's vault for years, so there was little risk of default so long as the goldsmith maintained public trust and was financially sound.

The promissory notes developed into an assignable instrument, which could circulate as a safe and convenient form of money backed by the goldsmith's promise to pay. Goldsmiths were able to advance loans, issue promissory notes, and offer checking accounts allowing depositors to draw down their balances held by issuing checks.27 This is how the London goldsmiths became the issuers of money and credit, and went on to give birth to the banking system.

This led to the establishment of banks, which issued paper notes called banknotes. These notes circulated in the same way that government-issued currency circulates today. In essence, each bank would have the ability to issue its own currency. This practice continued until 1694, when England decided to monopolize the right to issue banknotes and established the Bank of England (central bank).

In the United States, this practice continued through the nineteenth century until the Federal Reserve Bank was established in 1913. At one time there were more than 5,000 different types of banknotes issued by various commercial banks in the United States, some reputable and some not so reputable. The notes issued by the largest, most creditworthy banks were widely accepted. The banknotes of the smaller and less reputable banks circulated locally. Farther from home banknotes were accepted only at a discounted rate, if they were accepted at all. The proliferation of types of money went hand in hand with a multiplication in the number of financial institutions.

These banknotes were a form of representative money, which could be converted into gold or silver by application at the bank. Since banks issued notes far in excess of the gold and silver they kept on deposit, sudden loss of public confidence in a bank could cause mass redemption of banknotes and result in bankruptcy.

The use of banknotes issued by private commercial banks as legal tender has gradually been replaced by the issuance of banknotes authorized and controlled by national governments. Until recently, these government-authorized currencies were forms of representative money, since they were partially backed by gold or silver and were theoretically convertible into gold or silver. This has since changed, as convertibility and linking currency to any tangible asset was dropped in favor of being backed by simply the trust in the issuing authority and its creditworthiness, otherwise known as fiat currency.

It is important to understand why nations switched from representative money to fiat money, as this is where the story begins to explain why we are in a financial mess today.